I’ve posted Entry #313 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The True Stock Return Can (Almost) Never Be Negative.
Juicy Excerpt: I believe that there is hardly ever a year in which the true stock return is negative. The businesses that underly the U.S. stock market possess assets that grow in value over time. Rational investors would not permit short-term developments to influence their assessments of market value too much. They would respond with a shrug of the shoulders to negative economic developments, assuring themselves that the U.S. economy has for over one-hundred years been generating sufficient growth to support an annual price increase of 6.5 percent real and that the best bet is that that will continue to be the case. The true stock return (that is, the amount that the market as a whole would increase in value if only investors were as rational as the Buy-and-Holders assume them to be) is always 6.5 percent real or something close to it.
x says
As you are so fond of pointing out, there are post archives:
“Rob says
December 5, 2014 at 6:03 am
You’ve asked me what I will do if there is not another crash within the next two years. I have said that I will write a column saying that that tells me that there is something wrong with the Valuation-Informed Indexing concept and that I will continue studying the matter to try to figure out what really works best.”
You have a month to draft and polish that column. Of course, you won’t. Attempting to type “there is something wrong with VII” would cause your fingers to snap off.
Rob says
No, that’s not so.
I have an article at this site titled something like “20 Reasons to Have Doubts About the VII Strategy.” There IS something wrong with VII. The biggest thing that is wrong with it is that we have not had enough people study it in depth to have confidence in it. We need to have lots of good and smart people doing their best to find holes in it. That’s how we learn. I believe strongly that VII is the future of investing analysis. But am obviously biased and extremely so. I have invested 14 years of my life in this. Anyone who goes just by what I say is a darn fool. We need to have lots of people looking at this and seeking to poke holes in it.
I am not going to have that column up by the end of this year. But I do have a column like that in my list of future columns. So it will probably come out in the early part of next year. My tentative title is “The Odds That We Will See Another Crash By the End of 2007 Are Now Less Than 50 Percent.” There’s only a small bit of time left in 2016. So I pretty much rule out the possibility that the prediction will be proven accurate. I now say that we should see the next crash “within the next year or two or three.” That takes us to late 2019. If you go ten years out from September 2008, you get to late 2018. I am adding an extra year to be extra careful that I do not flame out on yet another prediction. The odds are probably stronger in the first of the three years than in the last of the three years. So I think that it is probably so that the odds of seeing the crash in 2017 are a tiny bit less than 50 percent (even though 2017 is the most likely year of the three years).
Again, all of this DOES indeed show that, “there is something wrong with VII.” I am not disputing that. I am saying that VII is the best strategy that we can come up with given what we know from the research available to us today, nothing more and nothing less. We need to continue to advance in our understanding of these maters. We do that by talking things over, by exploring new ideas and confirming or refuting earlier ones and by performing new research. That’s just the standard way by which humankind advances in its understanding of things over time. We need to follow the standard procedures that apply in all other fields of human endeavor to the stock investing field as well.
That’s my sincere take in any event, X. I naturally wish you all good things.
Rob
Anonymous says
If the crash doesn’t happen by 2019, will you be extended the date to 2021?
Rob says
Market prices have not followed a random walk for 145 years running now. If Buy-and-Hold continues to fail for another 145 years, will you then wait another 145 years?
Show me something better than a strategy that has worked for 145 years running and I will take a look at it. Until somebody comes up with something else that is supported by the entire historical record, yes, I will continue to push the date out. But I will ALSO point out that my earlier predictions have failed. My hope is that being honest about these matters will give those seeking to figure out the realities some encouragement.
I would be happy to find something better than VII, Anonymous. Have you got any ideas? You are not going to come up with any by continuing to defend a strategy that was discredited by the peer-reviewed research in this field 35 years ago.
That’s where I am coming from. I don’t say that I know it all. I do say that I don’t feel comfortable posting in support of a strategy that has failed every test.
Rob
laugh says
Why is the entire historical record relevant?
Rob says
Take a look at this article, Laugh:
http://www.politico.com/story/2016/11/nate-silver-huffington-post-polls-twitter-230815
Nate Silver gets it. Using data as a guide to understanding something leads to more uncertainty, not less. When we are ignorant of how something works, we can delude ourselves into a false feeling of confidence. Data helps us to overcome our subjective biases because it is objective, because it is real and not b.s. But there’s an unfortunate inclination to become overconfident about what data appears to teach, to stop thinking because of a belief that the data has answered all the questions. There are always new questions. Use data properly and you will never stop searching for new insights The wonder of research is that it pokes holes in dogmatism. When you see people becoming dogmatic about what the data appears to show at one particular point in time, you know that those people are on the wrong track.
The Buy-and-Hold “idea” (that there is no need to exercise price discipline when buying stocks) has been crashing stock markets ever since the day the first stock market was put in place. In 1981, those awful days of human ignorance came to an end. A fellow who has since been awarded a Nobel prize for his amazing work provided us the piece of the investing puzzle that brought us to where we had long wanted to go — we now have a model for understanding stock investing that truly makes sense, that truly works.
Bogle got us close. He is a hero too. But Bogle is a gravely flawed hero. He got us close by citing the powerful insights developed through study of the historical return data in the pre-1981 years. Then he let his ego destroy him. Bogle turned his back on all the good work he had done up to that time when he elected in 1981 not to launch a national debate as to what Shiller’s “revolutionary” (Shiller’s word) research meant for Buy-and-Hold but to instead go into cover-up mode and act as if the amazing finding that valuations affect long-term returns just didn’t exist.
Hence 35 wasted years in which thousands of people who could be helping us all to better understand this stuff instead live in fear of speaking in plain and understandable terms about what they really believe re stock investing. Hence 14 years of a Campaign of Terror against the Retire Early and Investing discussion-board communities in which dozens of boards and blogs were destroyed or compromised and in which those participating in the campaign have set themselves up for long prison sentences in the days following the next price crash. Hence an economic crisis that has already gone down in the books as the second worst in U.S. history and which has a good chance of taking over first place in the days following the next price crash, an economic crisis that has already brought on millions of job losses and which is likely to cause millions of failed retirements in coming days.
Not good.
I learned why the entire historical record is relevant from my good friend Jack Bogle. Read his work if you have any doubts.
I learned why honesty is important just from living life on this planet.
Valuation-Informed Indexing is the first HONEST research-backed investing strategy. It has all the advantages of Buy-and-Hold because it is rooted in research, just like Buy-and-Hold. But it avoids the huge disadvantage of Buy-and-Hold by incorporating HONESTY into the mix. VII isn’t a con. VII doesn’t cause economic crises or failed retirements. Valuation-Informed Indexers don’t need to surround themselves with Goon squads to make their case. We really have peer-reviewed research that supports our claims. VII is the real thing, not the marketing gimmick that Buy-and-Hold has become in the years since Bogle made his tragic decision to go into cover-up mode rather than to come clean about what the recent peer-reviewed research actually says about how stock investing works.
The historical record is what keeps us honest. The historical record is our protection against the con men who push smelly Get Rich Quick schemes on us for the purpose of turning a quick buck and who destroy millions of lives in the process. The historical record is where its at. Making HONEST use of the historical record is the future of investing analysis. Everyone in this field will be doing it once prison sentences for you Goons have been announced.
That’s my sincere take re these terribly important matters, in any event.
My best and warmest wishes to you and yours.
Rob
Anonymous says
Yet Nate Silver was totally wrong about Trump in the primary. Your examples are laughable.
Rob says
He was wrong. But his model wasn’t wrong. His mistake was not sticking with the model.
This is the same mistake that the Buy-and-Holders made. Bogle said that we should follow the peer-reviewed research so that we could avoid falling victim to our Get Rich Quick urges. Then, when the peer-reviewed research showed that he had made a mistake, he ignored that research.
Following research really is a good idea. But the same biases that cause those who don’t follow research to make mistakes can cause those who pretend to follow research to make mistakes by being selective about what research they follow. In that case, those who pretend to follow research are in worse shape because they become dogmatic about their biases, claiming that there is research that supports them even though that is not so.
The difference between Bogle and Silver is that Silver acknowledged his mistake and learned from it. Bogle is still ignoring Shiller’s findings and promoting his smelly Buy-and-Hold garbage to this day.
Rob